A lot of newspapers and magazines have been celebrating the rising value of gold and silver over the last few years, citing as a reason why investing in gold might be a good idea. A lot of other newspapers and magazines are noting that gold may be overpriced and that a gold bubble has formed. Regardless of who is right, I think it illustrates a fundamental problem we all face every single day.
On a recent vacation to Miami, I was amazed at the number of luxury cars cruising along the highway. You usually see Maseratis and Aston Martins parked outside clubs or hotels, where the valet can keep a very close eye on them, but you don’t usually see them rolling along in rush hour traffic. Most of us would never spend that kind of money on a car and can’t understand why someone else would spend that kind of money on a car. The problem is that you see it as a car, the driver sees it as something else. Maybe it’s a status symbol to support an image he or she is presenting.
Maybe they’re an agent and it’s important, to their business, for them to appear successful and influential. A hundred grand on a car to secure a deal worth a few million is a small price to pay. A hundred grand on something to get you to the supermarket is way too much.
The same is true for gold. Gold has traditionally been seen as insurance. If the dollar were to lose all of its value, you could take your bars of gold to another country and trade them for the local currency. If you’ve heard of it referred to as a “store of value,” that’s what that means. Gold holds its value because it remains stable against other currencies, even if your currency is plummeting to zero. When you buy gold, you should think of it as insurance, not as an investment.
The problem is that this type of insurance, unlike auto or homeowners, is finite. As demand increases because people are worried of a default, the price increases. This attracts speculators who see an opportunity. This is true for any commodity, whether it’s corn, oil, or gold. There are people who buy it because they need it and there are people who buy it because they hope it’ll be worth more tomorrow.
We’re in the period where gold’s price has been boosted by speculators, I don’t think I’m going out on a limb when I say that. If you’re buying it because you want an investment, I’d move on. If you’re buying it because you recognize it’s insurance against catastrophe, then $1300+ an ounce is simply the price you have to pay. If there is a catastrophe, you have something with value that you can take with you. If there isn’t, you’re happy because you’ve retained the rest of your wealth.
Is it any different than car insurance? No one wants to be in an accident. 🙂
I’m eager to hear your thoughts on this…